01_TheRoleofAccounting_FinancialAccounting.pptx

The Role of Accou nting

1. Financial Accounting Module 1: The Role of Accounting

2. Module Learning Outcomes Explain the role of accounting in business 1.1: Define accounting and explain its history 1.2: Identify the ways we use accounting 1.3: State the accounting equation 1.4: Explain the effect of transactions on the accounting equation 1.5: Identify challenges in accounting

3. Accounting Defined

4. Learning Outcomes: Accounting Defined 1.1: Define accounting and explain its history 1.1.1: Define accounting 1.1.2: Describe the evolution of accounting 1.1.3: Explain the importance of accounting

5. What Is Accounting? The American Accounting Association defines accounting as: the process of identifying, measuring, and communicating economic information to permit informed judgments and decisions by the users of the information. Accounting vs. Bookkeeping Bookkeeping is a mechanical process that records the routine economic activities of a business. Accounting includes bookkeeping but goes well beyond it in scope: for example, accountants also analyze and interpret financial information and prepare financial documents.

6. The Evolution of Accounting The earliest known accounting records were created over 7,000 years ago.  In 1494 Luca Bartolomeo de Pacioli wrote: “Summa de Arithmetica, Geometria, Proportioni et Proportionalita,” which became the teaching text for bookkeeping and accounting for the next several hundred years. It was the expansion of the railroad that transformed the practice of accounting: to get goods and people to their destinations, you need a common set of standards. The profession of accounting was recognized in 1896 with a law stating the title of a Certified Public Accountant (CPA) required passing a test and three years of experience.

7. Why Accounting Matters Accounting allows you to answer key business questions, such as: How is my business doing right now? Is it making money? How did we do last year? How much money is in the bank right now?

8. Accounting Information

9. Learning Outcomes: Accounting Information 1.2: Identify the ways we use accounting 1.2.1: Identify users of accounting information 1.2.2: Compare and contrast financial and managerial accounting 1.2.3: Describe the unique way the government uses accounting information

10. Users of Accounting Information Internal Users Owners Managers External Users Prospective and current board members or investors Creditors and lenders Employees and their unions Customers General public Government

11. Financial vs Managerial Accounting Financial accounting information appears in financial statements that are intended primarily for external users, like stockholders and creditors. Managerial accounting is the accounting that provides managers and owners (internal users) with financial information that they need in order to make operational and strategic decisions.

12. Other Areas of Accounting Non-Profit Accounting: Non-profit entities, as the name implies, exist for purposes other than making a profit. Instead of business owners, a state incorporates a non-profit to benefit the public, and so the major stakeholders are the public, or in the case of some clubs, the members. Forensic Accounting: Forensic accounting involves investigating and reporting on financial crimes, fraud, and harmful business practices. Forensic accountants may be called upon to testify in court, and the work product of a forensic accountant may be admitted as evidence. Tax Accounting: Government agencies that track and use taxes are interested in the financial story of a business. They want to know whether the business is paying taxes according to current tax laws.

13. Government Reporting Today, taxes based on income or sales and payroll taxes make up the vast majority of local and national revenues.  The National Internal Revenue Code (NIRC) is administered by the Bureau of Internal Revenue (BIR), which is responsible for: enforcing tax laws, assessing and collecting taxes, and ensuring compliance with tax regulations in the Philippines.

14. Government Reporting The code has undergone several amendments over the years to adapt to changing economic conditions and policy reforms. So the financial accountants for a business may have to keep several sets of records: managerial accounting for internal users financial accounting for external users tax accounting for governmental reporting

15. The Basic Accounting Equation

16. Learning Outcomes: The Basic Accounting Equation 1.3: State the accounting equation 1.3.1: Explain the basic accounting question 1.3.2: Define assets 1.3.3: Define liabilities 1.3.4: Define owners’ equity

17. Who here has ever saved money or bought something expensive using your savings?

18. Imagine you are starting your own business, say a coffee shop. You borrow money from a bank, invest your savings, and buy equipment. How do you know how much your business worth? How do you track what you own, owe, and how much you have invested?

19. The Accounting Equation One of the cornerstones of financial accounting is the accounting equation, which in its simplest form, looks like this: assets = liabilities + owner’s equity or A = L + OE This equation has to always stay in balance.

20. Assets In financial accounting, an asset must meet two criteria: The company must own or control it. It must be expected to generate future benefit for that company. Assets fall into two general subcategories Current assets are expected to convert into cash within a relatively short period of time (usually one year).  Noncurrent assets produce revenue over a long period of time by being used to produce inventory, but they won’t be converted to cash any time soon.

21. Liabilities Liability is the accounting term for debt. Like assets, liabilities are categorized as current and noncurrent. There are a wide variety of items that can be liabilities, and many accounts are unique to a specific company. Current liabilities are items that must be paid soon. Noncurrent liabilities are more long-term debts.

22. Owner’s Equity Owner’s equity can be further broken down into four components: Capital contributed.  This represents the dollar value of resources put into the company by the owner. Often, this is cash, but it could also be assets like machinery or accounts receivable. In any case, these are personal assets that are used to fund the business. Withdrawals.  This is the dollar value of resources (usually cash) taken out of the company by the owner for personal use. Revenues.  This is the income a business takes in. We’ll further define and discuss revenues on this page. Expenses.  This is what the business spends. We’ll further define and discuss expenses on this page. Note: revenue – expense = profit

23. Question 1 Peejong starts a business with PHP 10,000 in cash (owner’s investment), buys equipment worth PHP 5,000.00 on credit, and earns PHP 2,000.00 in revenue What are the Assets? Liabilities? And Owner’s Equity?

24. Question 2 Peejong started a new company this year called PeeTec . The first thing he did was contribute PHP50,000 of his savings and PHP5,000 of computer equipment to the company. After a year of operation, PeeTec earned PHP35,000 in revenue and incurred PHP5,500 in expenses. Peejong needed to pay off his leased car and needed to withdraw some of the funds from the company to do it. What is the maximum cash amount from which Peejong could withdraw from the company? PHP50,000 PHP35,000 PHP79,500 PHP29,500

25. How understanding the basic accounting equation can help you in your personal finances or future businesses?

26. Why is it important to balance what you own, and what you owe in real life, not just in business?

27. Accounting in Business August 31, 2024

28. Learning Outcomes: Accounting in Business 1.4: Explain the effect of transactions on the accounting equation 1.4.1: Explain the effect of various transactions on the accounting equation 1.4.2: Differentiate among service, manufacturing, and merchandising businesses 1.4.3: Differentiate among common financial statements

29. What is the basic accounting equation?  

30. Transactions and the Accounting Equation  One of the key aspects of the process is keeping “running totals” of things. Examples of items a business might keep track of include the following: the amount of cash the business currently has what a company has paid for utilities for the month the amount of money it owes a company’s income for the entire year the total cost of all the equipment it has purchased It’s important that businesses keep these running totals up to date so they are readily available when they need the information.

31. Types of Business Activities There are three forms of business organizations: Service companies  perform services for a fee. This group includes accounting firms, law firms, and dry cleaning establishments. Merchandising companies  purchase goods that are ready for sale and then sell them to customers. Merchandising companies include auto dealerships, clothing stores, and supermarkets. Manufacturing companies  buy materials, convert them into products, and then sell the products to other companies or the final consumers. Manufacturing companies include steel mills, auto manufacturers, and clothing manufacturers.

32. Financial Statements There are four basic financial statements and they are prepared in the following order: Income Statement Statement of Owner’s Equity Balance Sheet Statement of Cash Flows

33. Scenario You are the owner of a new business called "Bright Start Enterprises." You need to decide on the type of business you want to start (service, manufacturing, or merchandising). After deciding, you will go through a series of transactions and track how these affect the accounting equation and the financial statements.

34. STEPS Business Selection: Choose whether "Bright Start Enterprises" will be a service business, a manufacturing business, or a merchandising business. Discuss as a class how the nature of the business affects what the company sells and how it operates.

35. 2. Initial Transactions: The business owner invests PHP10,000 in cash into the business. The business takes out a loan of PHP5,000 to purchase necessary equipment. The business buys inventory (if merchandising or manufacturing) or tools (if service) for PHP3,000.

36. 3. Business Operations: The business sells PHP4,000 worth of goods/services, with PHP3,000 collected in cash and PHP1,000 on credit. Pay PHP1,000 in operating expenses (like rent, utilities, or wages).

37. 4. Differentiate Financial Statements: Prepare a basic Income Statement showing the revenue, expenses, and net income for the business. Prepare a simple Statement of Financial Position (Balance Sheet) after all transactions. Discuss how the Income Statement and Balance Sheet differ in terms of purpose and content.

38. Business Selection: Let's assume "Bright Start Enterprises" is chosen as a merchandising business . This type of business purchases goods from suppliers and sells them to customers.

39. Step 1: Initial Transactions Owner’s Investment: Transaction: The owner invests PHP10,000 in cash. Effect on Accounting Equation: Assets (Cash) = PHP10,000 Liabilities = PHP0 Owner’s Equity (Capital) = PHP10,000 Accounting Equation: Assets = Liabilities + Owner’s Equity PHP10,000 = PHP0 + PHP10,000

40. Accounting Equation: Assets = Liabilities + Owner’s Equity PHP10,000 = PHP0 + PHP10,000

41. 2. Loan for Equipment: Transaction: The business takes out a PHP5,000 loan to purchase equipment. Effect on Accounting Equation: Assets (Cash) = PHP10,000 (existing) + PHP5,000 (loan) = PHP15,000 Liabilities (Loan) = PHP5,000 Owner’s Equity = PHP10,000 (no change) Accounting Equation: Assets = Liabilities + Owner’s Equity PHP15,000 = PHP5,000 + PHP10,000

42. Accounting Equation: Assets = Liabilities + Owner’s Equity PHP15,000 = PHP5,000 + PHP10,000

43. 3. Purchase Inventory: Transaction: The business purchases PHP3,000 worth of inventory. Effect on Accounting Equation: Assets (Inventory) = PHP3,000 Assets (Cash) = PHP15,000 - PHP3,000 = PHP12,000 Liabilities = PHP5,000 (no change) Owner’s Equity = PHP10,000 (no change) Accounting Equation: Assets = Liabilities + Owner’s Equity PHP15,000 (PHP12,000 Cash + PHP3,000 Inventory) = PHP5,000 + PHP10,000

44. 3. Purchase Inventory: Transaction: The business purchases PHP3,000 worth of inventory. Effect on Accounting Equation: Assets (Inventory) = PHP3,000 Assets (Cash) = PHP15,000 - PHP3,000 = PHP12,000 Liabilities = PHP5,000 (no change) Owner’s Equity = PHP10,000 (no change) Accounting Equation: Assets = Liabilities + Owner’s Equity PHP15,000 (PHP12,000 Cash + PHP3,000 Inventory) = PHP5,000 + PHP10,000

45. Step 2: Business Operations 1. Sales of Goods: Transaction: The business sells goods for PHP4,000, with PHP3,000 collected in cash and PHP1,000 on credit. Effect on Accounting Equation: Assets (Cash) = PHP12,000 + PHP3,000 (cash from sales) = PHP15,000 Assets (Accounts Receivable) = PHP1,000 Liabilities = PHP5,000 (no change) Owner’s Equity (Revenue) = PHP4,000 (increase)

46. Accounting Equation: Assets = Liabilities + Owner’s Equity PHP16,000 (PHP15,000 Cash + PHP1,000 Accounts Receivable) = PHP5,000 + PHP14,000

47. 2. Payment of Operating Expenses: Transaction: The business pays PHP1,000 in operating expenses (e.g., rent, utilities). Effect on Accounting Equation: Assets (Cash) = PHP15,000 - PHP1,000 = PHP14,000 Liabilities = PHP5,000 (no change) Owner’s Equity (Expenses) = PHP14,000 - PHP1,000 = PHP13,000

48. Accounting Equation: Assets = Liabilities + Owner’s Equity PHP15,000 (PHP14,000 Cash + PHP1,000 Accounts Receivable) = PHP5,000 + PHP13,000

49. Step 3: Financial Statements 1. Income Statement (for the period): Bright Start Enterprises Income Statement For the Period Ending [Date] Description Amount Revenue PHP 4,000 Expenses PHP 1,000 Net Income PHP 3,000

50. Step 3: Financial Statements 2. Statement of Financial Position (Balance Sheet): Bright Start Enterprises Statement of Financial Position As of [Date] Assets Amount Cash PHP 14,000 Account Receivables PHP 1,000 Inventory PHP 3,000 Total Assets PHP 18,000

51. Step 3: Financial Statements Liabilities Amount Loan Payable PHP 5,000 Total Liabilities PHP 5,000 Owner’s Equity Amount Capital PHP 10,000 Net Income PHP 3,000 Total Equity PHP 13,000 | Total Liabilities + Equity | PHP 18,000 |

52. Assignment: Lopez Consulting Bella Lopez started Lopez Consulting, a new business, and completed the following transactions during its first year of operations: B. Lopez invests PHP70,000 cash and office equipment valued at PHP10,000. The company purchased a PHP150,000 building to use as an office. Lopez paid PHP20,000 in cash and signed a note payable promising to pay the PHP130,000 balance over the next ten years. The company purchased office equipment for PHP15,000 cash. The company purchased PHP1,200 of office supplies and PHP1,700 of office equipment on credit. The company paid a local newspaper PHP500 cash for printing an announcement of the office's opening. The company completed a financial plan for a client and billed that client PHP2,800 for the service. The company designed a financial plan for another client and immediately collected an PHP4,000 cash fee. The company received PHP1,800 cash as partial payment from the client described in transaction  f . The company made a partial payment of PHP700 cash on the equipment purchased in transaction  d . The company paid PHP1,800 cash for the office secretary's wages for this period.  

53. Assignment: Lopez Consulting Instructions Complete the table Transaction Assets ( Cash, Equipment, Supplies, Account Receivable, Building) Liabilities (Account Payable, Note Payable) Owner’s Equity (Capital, Revenue, Expenses) A B C D E F G H I J

54. Challenges in Accounting September 02, 2024

55. Learning Outcomes: Challenges in Accounting 1.5: Identify challenges in accounting 1.5.1: Describe the role of ethics in accounting 1.5.2: Identify significant events in the history of accounting 1.5.3: Identify the organizations that govern accounting

56. Ethics in Accounting An accountant’s career is heavily reliant on their clients’ trust in them. Several accounting organizations have codes of ethics governing the behavior of their members.  AICPA’S Code of Professional Conduct: Responsibilities principle. The public interest principle. Integrity principle. Objectivity and independence principle.  Due care principle. Scope and nature of services principle.

57. Significant Events in Accounting Over the past five hundred plus years, accounting has seen its share of ups and downs. 

58. Regulations in Accounting (Philippines) SEC (Securities and Exchange Commission): The SEC in the Philippines is the government agency responsible for regulating and supervising the corporate sector, capital market participants, securities and investment instrument, and protecting the investing public. Financial Reporting Standards Council (FRSC) The FRSC is the body officially recognized by the SEC in the Philippines to establish generally accepted accounting principles (GAAP) for all Philippine entities. It adopts International Reporting Standards (IFRS) issued by the IASB as Philippine Financial Reporting Standards (PFRS)

59. Regulations in Accounting (Philippines) BIR (Bureau of Internal Revenue) The BIR in the government agency responsible for the assessment and collection of all national internal revenue taxes, fees, and charges. It enforces the National Internal Revenue Code (NIRC), which contains the tax laws and regulations that accountants must adhere to in the Philippines. International Accounting Standards Board (IASB) The IASB is the global body responsible for developing International Financial Reporting Standards (IFRS). The FRSC adopts these standards as Philippine Financial Reporting Standards (PFRS) for use in the Philippines

60. Practice Question 2 Which of the following institutions sets the standards for international standards for financial reporting? IASB FASB IFA SEC

61. Quick Review What is the definition of accounting? Describe the evolution of accounting. Why is accounting important? Who uses financial accounting information? What are the differences between financial and managerial accounting? Describe the unique way the government uses accounting information. What is the basic accounting question? What is the definition of assets in accounting? Define what liabilities are in accounting.

62. More Quick Review What does owner’s equity mean in accounting? What is the effect of various transactions on the accounting equation? Differentiate between service, manufacturing, and merchandising businesses. What are the differences between the common financial statements? How do ethics play a role in accounting? What are significant historic events in the long history of accounting? Which organizations govern and set rules and principles for accounting?